Hunt­ing for Eurobonds

Views split on sub-Sa­ha­ran Africa’s de­but in the in­ter­na­tional mar­kets

At­tracted by the pre­vail­ing low in­ter­est rates, cash- strapped African coun­tries look­ing to bor­row money on in­ter­na­tional pri­vate mar­kets are in­creas­ingly turn­ing to Eurobonds as the in­stru­ment of choice. In 2006, Sey­chelles be­came the first coun­try in sub- Sa­ha­ran Africa, other than South Africa, to is­sue bonds. A year later Ghana fol­lowed, rais­ing $750 mil­lion in Eurobonds. Since then they have been joined by Gabon, Sene­gal, Côte d’Ivoire, the Demo­cratic Repub­lic of Congo, Nige­ria, Namibia and Zam­bia.

In Septem­ber 2012, Zam­bia made a splash on the in­ter­na­tional pri­vate mar­ket, launch­ing a 10-year bond at $750 mil­lion. The is­sue was over­sub­scribed by $11 mil­lion and be­came a model for other African na­tions. Rwanda fol­lowed suit in 2013 with a $400 mil­lion Eurobond is­sued on the Ir­ish Stock Ex­change. Zam­bia is con­sid­er­ing is­su­ing a $1 bil­lion Eurobond this year to fi­nance its bud­get deficit. It also plans to spend over $600 mil­lion on de­vel­op­ing power, road and rail in­fra­struc­ture. Kenya is fi­nal­iz­ing plans for its de­but en­try into the Eurobond mar­ket, seek­ing up to $1.5 bil­lion to fi­nance in­fra­struc­ture projects.

Sub-Sa­ha­ran Africa’s sec­ond-largest econ­omy, Nige­ria, first en­tered the mar­kets in 2011 with a 10-year Eurobond. “We look to come [to the mar­ket] reg­u­larly, ev­ery two years,” Fi­nance Min­is­ter Ngozi Okonjo-Iweala told the Fi­nan­cial Times. In 2012, African coun­tries raised about $8.1 bil­lion from is­su­ing bonds, says Moody’s, a global credit rat­ing agency. In to­tal, more than 20% of the 48 coun­tries in sub-Sa­ha­ran Africa have sold Eurobonds, ac­cord­ing to the In­ter­na­tional Mone­tary Fund (IMF).

For cer­tain gov­ern­ments in sub­Sa­ha­ran Africa, Eurobonds are a means of di­ver­si­fy­ing sources of in­vest­ment fi­nance and mov­ing away from tra­di­tional for­eign aid. Not only do these bonds al­low such gov­ern­ments to raise money for devel­op­ment projects when do­mes­tic re­sources are want­ing, they also help re­duce bud­getary deficits in an en­vi­ron­ment in which donors are not will­ing to in­crease their over­seas devel­op­ment as­sis­tance.

Cor­po­rate en­ti­ties in sub- Sa­ha­ran Africa, like Guar­anty Trust Bank in Nige­ria and Voda­fone Ghana, have also suc­cess­fully is­sued Eurobonds. Global in­vestors have been ea­ger to pur­chase these bonds for higher yields amid low re­turns in ma­ture mar­kets. It is a sign of the in­vestors’ en­dorse­ment of the re­gion’s buoy­ant eco­nomic prospects, ob­serves Mthuli Ncube, chief econ­o­mist and vi­cepres­i­dent of the African Devel­op­ment Bank (AfDB). The de­vel­oped world has been rocked by a se­ries of eco­nomic and fi­nan­cial crises while Africa has dis­played steady growth over re­cent years, av­er­ag­ing about 5% per an­num. An­a­lysts be­lieve the in­cen­tive for in­vestors is solely the prospect of higher gains.

Eurobonds have also given African coun­tries an op­por­tu­nity to in­te­grate into global fi­nan­cial mar­kets. Up un­til re­cently, ac­cord­ing to the AfDB, ac­cess was lim­ited for African coun­tries apart from Morocco, South Africa and Tu­nisia, which en­tered the mar­kets in the 1990s. In ad­di­tion, bond is­suances come with fewer strings at­tached than money from mul­ti­lat­eral in­sti­tu­tions. Gov­ern­ments also have more con­trol over where they chan­nel the money.

Other rea­sons be­hind the re­cent surge in bor­row­ing by African coun­tries, ac­cord­ing to the IMF, are changes in the in­sti­tu­tional en­vi­ron­ment, such as more flex­i­bil­ity for low-in­come coun­tries with ac­cess to non- con­ces­sional bor­row­ing, re­duced debt bur­dens, large bor­row­ing needs and his­tor­i­cally low bor­row­ing

Re­cent spec­u­la­tion that the U. S. Fed­eral Re­serve bond-buy­ing pro­gramme would end in 2014, along with ris­ing U. S. trea­sury yields, sparked a sell-off in emerg­ing mar­kets, An­gus Downie, the head of eco­nomic re­search at Ecobank, a pan-African bank, told Busi­ness Daily of Kenya. “In­vestors will want higher yields,” he says. Since the be­gin­ning of 2014, the Fed­eral Re­serve has started cut­ting back on its bond-buy­ing pro­gramme, lead­ing to spec­u­la­tion that this might spark an in­crease in in­ter­est rates. Higher in­ter­est rates raise the cost of ser­vic­ing the na­tional debt. In a re­cent ar­ti­cle, the Wall

Street Jour­nal showed Nige­ria’s Eurobond trad­ing at a yield of 6.375%, up from 4% in late April, be­cause of wan­ing in­vestor in­ter­est, adding that Rwanda is now trad­ing north of 8%.

On the flip side, these bonds have not been the sav­ing grace that African coun­tries thought they would be. In an ar­ti­cle en­ti­tled “First Bor­row,” Amadou Sy, deputy divi­sion chief of the IMF’s Mone­tary and Cap­i­tal Mar­kets Depart­ment, points to some re­cent sov­er­eign de­faults in sub-Sa­ha­ran Africa. The Sey­chelles de­faulted on a $230 mil­lion Eurobond in 2008, after a sharp plunge in tourism rev­enues and years of ex­ces­sive govern­ment spend­ing. Côte d’Ivoire missed a $29 mil­lion in­ter­est pay­ment after its 2011 elec­tion dis­putes forced it to de­fault on a bond is­sued in 2010. Ghana and Gabon are strug­gling to find money for a $750 mil­lion and $1 bil­lion bond, re­spec­tively, on 10-year Eurobonds that will reach ma­tu­rity in 2017. But this has not de­terred African coun­tries from is­su­ing bonds, al­though they are bor­row­ing at high in­ter­est rates.

Joseph Stiglitz, a No­bel lau­re­ate in eco­nomics and Columbia Univer­sity pro­fes­sor, ques­tions in a blog for the

Guardian this new trend for “pri­vate sec­tor bor­row­ing” by de­vel­op­ing coun­tries. The sov­er­eign Eurobonds carry sig­nif­i­cantly higher bor­row­ing costs than con­ces­sional debt, Stiglitz notes. He wor­ries about “ex­ces­sive bor­row­ing” over the long term, which ben­e­fits only the banks be­cause they “take their fees up front.” African coun­tries, Stiglitz be­lieves, should have in place a “com­pre­hen­sive debt-man­age­ment struc­ture”; they should also in­vest wisely and re­frain from bor­row­ing fur­ther in order to re­pay their debts.

Whether the “rash of bor­row­ing by sub- Sa­ha­ran African gov­ern­ments is sus­tain­able over the medium-to-long term is open to ques­tion,” echoes IMF’s Sy. If the low-in­ter­est-rate en­vi­ron­ment changes, it could re­duce in­vestors’ ap­petite for the bonds and “eco­nomic growth may not con­tinue, mak­ing it harder for coun­tries to ser­vice their loans,” he adds.

Po­lit­i­cal in­sta­bil­ity is some­thing else that could put a wrench in the whole process, low­er­ing eco­nomic growth and in­creas­ing in­ter­est rates. It is no co­in­ci­dence that coun­tries such as Ghana, Kenya and Nige­ria that have had po­lit­i­cal sta­bil­ity in re­cent years have been able to—or in­tend to—sell bonds of at least $1 bil­lion. A change in the po­lit­i­cal sit­u­a­tion in such a coun­try, re­sult­ing in bad gov­er­nance, could drive back po­ten­tial bonds buy­ers, says Larry Seruma, chief in­vest­ment of­fi­cer of Nile Cap­i­tal Man­age­ment, which in­vests in Africa. And for Sy, de­vel­op­ing well-func­tion­ing do­mes­tic bond mar­kets to at­tract do­mes­tic and for­eign sav­ings over time is the way to go.